Judge Richard Posner of the Seventh Circuit—love him or hate him—just wrote a(nother) scathing opinion. He remanded a criminal restitution order, concluding that Bank of America was not entitled to any restitution for fraudulent mortgage loans because of the bank’s “deliberate indifference” in investigating the fraud.

The scheme was not complicated. The defendants gave some home buyers the money to make down payments on homes. Then the buyers included on their loan applications to Bank of America certain “false claims of creditworthiness.” Bank of America loaned them the money anyway. The defendants walked away from the transaction with the purchase price of each property minus the down payment amount, which they had provided to the buyer in the first place.

The opinion made clear that the guilt of the defendant was not at issue in the appeal. The only issue was the weather the restitution order that the defendants pay $893,015 to Bank of America was correctly imposed by the court below.

Judge Posner didn’t question the fact that Bank of America lost money in the deal. The bank representative stated in her written affidavit that “had the [Bank] known the true source of the down payment funds, it would not have issued the subject loans. ” Judge Posner responded that the court below was “wrong to take the bank representative at her word.”

In light of that affidavit, Judge Posner was off to the races. He wrote:

[T]he order of restitution is questionable because Bank of America, though not a co-conspirator of the defendants, does not have clean hands. It ignored clear signs of the loans that it was financing at the behest of the defendants were phony. Despite its bright-eyed beginning as an upstart neighborhood bank for Italian-American workers, Bank of America has a long history of blunders and shady practices.

Ouch.

He started with the Great Depression (and Bank of America’s troubled times then), but saved his harshest criticism for its $16.65 billion settlement with the Justice Department over mortgage fraud allegations.

The judge in that sentencing had made clear that Bank of America knew what was going on. While it had not been an active co-conspirator, it certainly hadn’t assumed any risk in the transactions. That judge had also noted that the loan applications “were a joke on their face.”

Judge Posner was loath to allow Bank of America to recover restitution here when it had not undertaken even the basic most basic due diligence. He pointed out that had the bank done any investigating of the loan applications, then it would have discovered that none of these applicants could have made the down payments.

The bank wasn’t just negligent. Judge Posner thought the bank was much more than that:

To say the bank was merely negligent would be wrong. Recklessness is closer to the mark. Negligence is merely failing to exercise due care; often it is unconscious. Recklessness is knowing involvement in potentially harmful activity.

In the end, Judge Posner concluded that the bank’s failure to investigate these loan applications “constituted a deliberate indifference toward palpable risk that the banks executives must have been aware of.” The bank had every incentive not to investigate the applications because it would immediately sell the loans to someone else.

Now, Judge Posner didn’t think the defendants should get to keep the money. After all, it had been stolen. But he strongly suggested that the lower court should imposed a fine rather than ordered restitution, because a fine would have ended up in the federal Treasury, “a far worthier recipient.”

Judge Posner, sitting on a court of appeals, couldn’t fashion the precise remedy he thought best. So he remanded to district court to give “serious consideration” to the possible alternative remedy of a heavy fine rather than restitution. He also suggested that either the Board of Governors of the Federal Reserve or the Office of the Comptroller of the Currency submit an amicus brief about the appropriateness of an order of restitution. (I’m not sure I’ve ever seen a court of appeals judge suggest certain amici weigh in on remand.)

Judge Posner also had to resolve two nagging issues.

First, there is the small matter of the Mandatory Victim Restitution Act which requires restitution (hey, it says “mandatory” right in the title) in fraud cases. That statute mandates restitution to the “victim” of the offense.

Judge Posner easily swept away this concern, concluding that “victim” did not accurately describe Bank of America, “especially when we consider its complicity in the loss – it’s reckless decision to make the loans without verifying the solvency of the would-be borrowers.” No victim=no restitution.

Second, the defendant had waived his right to appeal, so how can he possibly raise this issue of restitution now? Well, Judge Posner had no problem with that either, saying plainly: “we decided to ignore the appellate waiver.” He fell back on the oldest of reasons–enforcing the waiver would result in a “miscarriage of justice.” Essentially, giving the money to Bank of America when it didn’t deserve it, was a miscarriage of justice.

This opinion is interesting for a couple of reasons.

It’s just plain fun to read. There’s no doubt that Bank of America was sloppy in its mortgage loan practices over the last several years, and this opinion takes it to task for those failures. Judge Posner does so in his inimitable style.

But it’s also a useful opinion for another reason. Often in fraud cases, the “victim” is not the most sympathetic character. He may have participated in the conduct or known about it in some fashion and hoped to benefit from it. Other courts, reading this opinion, may think twice about ordering restitution to that individual (or entity) because he does not have clean hands.

From the standpoint of my client, this result can be cold comfort. There can be a certain satisfaction for my client knowing that the participating “victim” doesn’t get the money.of course, whether the amount is a fine or restitution doesn’t really matter to my client. He still has to pay it.